Question

If a stock's expected return exceeds its required return, this suggests that _____

a. The company is probably not trying to maximize price per share.
b. Dividends are not being declared.
c. The stock should be sold.
d. The stock is experiencing supernormal growth.
e. The stock is probably a good buy.

Answer 1

Options (d) and (e) are correct.

Step-by-step explanation:

Expected return refers to the return that an investor expected in the near future and it is the return from the stock. Required return refers to the return that is provided by the similar kind of investment. So, if the expected return on stock exceeds the required return then as a result this would indicates that this stock will experience a super-normal growth.

Now, suppose the required return is 12% and the expected return is 15% then this would suggest that this stock will be able to perform well as compared to the other peer stocks.